October 30, 2020 | AtoZ Markets – Australian brokerage firm Vantage FX has issued a notice to warn its clients that it expects increased market volatility in the next few days before the US Presidential election scheduled for Tuesday, November 3.
Forex brokers warn of spread widening
In the warning statement, Vantage FX states that it will not make any adjustments to leverage or margin requirements. Notably, in anticipation of worsening market conditions next week, some brokers, such as Switzerland-based Dukascopy, have already temporarily increased margin requirements. The leverage cuts target mainly Index CFDs and Bullion instruments.
However, the broker has warned its clients that liquidity providers and banks will retreat as uncertainty grips the market. On this account, stops may incur greater slippage, and stop out levels may be significantly above or below where clients expect to be executed.
What is Spread Widening and how does it affect traders' profits?
Put simply, a spread is the bid and ask price. In other words, it is the difference between where the trader may purchase or sell an underlying CFD asset. The difference between the bid and ask is basically what the broker will profit from your trade, whether your position ends up in profit or loss.
You can think of the spread as the trading cost for placing a position, thinner spreads essentially enable you to reduce your trading costs thus making profits larger or losses smaller after you close your positions.
During highly volatile events, spreads tend to widen. As a result, it becomes more expensive to trade these events. However, these events have a higher risk/reward ratio, which is what makes them so popular with forex traders. When spreads widen, however, your stop loss can be triggered before prices even begin trending and this can be catastrophic for your positions. Hence, the reasons why it is important to always investigate a broker’s spread widening during events of major volatility before attempting to trade with real funds.
Can Forex traders reduce the impact of spreads widening?
It is impossible to completely avoid spread widening. However, Forex traders can consider participating during liquid trading sessions. The US and London sessions usually offer liquid conditions, providing tight spreads. The overlap between the U.S. (New York) and London sessions between 1 pm and 5 pm GMT has the tendency of generating strong price moves.
Another option to help Forex traders minimize the effects of spread widening is to trade liquid currency pairs. According to the BIS Triennial Central Bank Survey April 2019, the US dollar maintained its dominant currency status, being on one side of 88% of all trades. On the other hand, the share of trades with the euro expanded somewhat, to 32%. By contrast, the Japanese yen share of trades dropped some 5% points. However, the yen remained the third most actively traded currency (on one side of 17% of all trades).
Read also: Top 10 Forex pairs to trade and NEVER trade!
Traditional major currency pairs, such as the EUR/USD, GBP/USD, USD/JPY, and AUD/USD often exhibit low spreads. Note each major currency pair contains the US dollar. Make sure not to trade exotic currency pairs, those of developing nations, which commonly carry large and often erratic spreads.
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